Imperfect price adjustment and the optimal assignment of monetary and fiscal policies

Mark Gertler

    Research output: Contribution to journalArticlepeer-review

    Abstract

    The paper considers the coordination of monetary and fiscal policy for a closed economy with the following properties: a Keynesian short-run, a classical steady state and serially correlated price adjustment. Given a set of plausible targets, the system is perfectly controllable in the sense of Aoki (1975) only when it is in the classical long-run equilibrium. The imperfect controllability outside the steady state is due to the inertia in the inflationary process. The paper derives a stabilization program which characterizes the optimal response of policy in light of the price adjustment mechanism. The resulting assignment of instruments is an interesting alteration of Mundell's (1962) formula.

    Original languageEnglish (US)
    Pages (from-to)305-320
    Number of pages16
    JournalJournal of Economic Dynamics and Control
    Volume1
    Issue number4
    DOIs
    StatePublished - Nov 1979

    ASJC Scopus subject areas

    • Economics and Econometrics
    • Control and Optimization
    • Applied Mathematics

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